What is a deposit guarantee?

September 4th, 2017

A deposit guarantee is an alternative method of placing a deposit on a property. It’s an option for clients who don’t want to use cash for a deposit – perhaps they are waiting for a settlement, have invested their cash in a fixed term deposit and are waiting for it to mature, or their cash is tied up in other assets that may take some time to sell.

A deposit guarantee is not a replacement for a cash deposit – it’s similar to a bank guarantee without the need to provide security. At settlement, your client simply pays the full purchase price including the deposit. So it’s important to note that a deposit guarantee is not suitable for your client if they cannot afford to purchase the property. A deposit guarantee is a great alternative if your client doesn’t have the cash handy right now, or would prefer not to tie up their cash for other reasons.

How does it work?

A deposit guarantee is a simple mechanism. A guarantee certificate is provided to the seller’s representative until settlement (usually their solicitor or conveyancer). At settlement, the purchaser pays the full price of the property including the deposit amount – at which point the guarantee certificate becomes void.

Deposit guarantees are usually based on the settlement period. There are two types available from our panel partner Deposit Power:

Short term: For settlement terms up to 6 months.

Long term: For settlement terms between 6 and 48 months, sometimes longer in certain circumstances.

What kind of clients would use a deposit guarantee?

Just about any kind of home loan or property investor customer may have a reason to use a deposit guarantee. It simply depends on their personal financial circumstances and goals. There are lots of potential uses for a deposit guarantee. They are particularly useful for property buyers who need to move quickly or are juggling their cash reserves. Here are a few popular ways to use a deposit guarantee:

As an alternative to bridging finance

If your client has sold a home and settlement is some time away, a deposit guarantee may be useful to help them avoid the expense of bridging finance when buying their next home. It could be a way to help your client get into their next home sooner.

To help first home buyers

In some circumstances, a deposit guarantee may be helpful for first home buyers who will be eligible to receive a First Home Owners’ Grant (FHOG) after settlement. Whilst proof of eligibility will be required, it could help your first home buyer customers use the money from the FHOG as part of their deposit and help them to get started on their home ownership journey sooner.

To support property investors

Property investors frequently need to move quickly on property purchases and it may take time to access equity or sell other investments to raise funds for a deposit. A deposit guarantee may be useful under these circumstances, or if a property investor wants to borrow 80 – 100% of the purchase price. Deposit guarantees can be used to purchase both residential and commercial properties, so they’re a useful option for property investors.

Off-the-plan-purchases

Deposit guarantees are also a useful option if your client is making an off-the-plan purchase, as they are available for up to 48 months. It’s an option that will enable you to assist your clients to avoid tying up their cash over a long period of time when it may be better invested elsewhere.

Terms & Conditions apply

Our panel partner Deposit Power make deposit guarantees available to any person living and residing permanently in Australia, but they are not available to overseas customers. A deposit guarantee may be provided to individuals, first home buyers, retirees, self-employed borrowers, trusts, corporate entities, or an SMSF purchasing residential or commercial property, provided they meet this requirement.

Eligibility criteria will apply.

Deposit Power have flexible qualifying criteria to meet customers varying financial circumstances.  Overall you need to ensure the customer has the financial capacity to complete on the proposed property purchase.  Invariably this will involve evidencing a customer has a loan approved or they own an existing property with equity in it.

• An unconditional loan approval
• A copy of the sales contract of the property being purchased
• Appropriate documentation evidencing your client’s financial situation
• Evidence of eligibility for the First Home Owners’ Grant (if applicable)
• Solicitor’s details for both buyer and seller.

Want to find out more?

Talk to your local Broker Support Manager or get in touch with the Accreditations Team at accreditations@connective.com.au if you’re not yet accredited with our panel partner Deposit Power. Once you are accredited, you can log in and make applications via Deposit Power’s web site or get assistance from the friendly Deposit Power team on 1800 678 979